The main trade partners for Germany are China and the European countries, and none of them are experiencing acceleration in economic growth. Italian and French economies are not performing and this has its impact on the export driven German economy. At the same time China is slowing down as it is transforming from an export and government investment driven economy into domestic consumption oriented one. All this happening at the same time has lead Germany close to recession. According to the Eurostat the Q3 economic growth in Germany was only 0.1%, which even less than that of France which saw its economic activity growing by 0.3%. This means that Germany’s growth over the period was even lower than euro area growth in general (only 0.2% during the Q3 2014). Previous year’s GDP growth during the same quarter was 0.8%, which highlights how dismal the current growth in euro area is: three quarters less than it was a year before.
German stocks measures by the DAX (30 biggest German stocks) were actually quite resilient when this report came out last Friday and did not plummet with the news. This is probably because we are living in the times where bad news is good news for stocks. This basically means that in this era of funny money providers (central banks creating money out of thin air) any bad news about economy increases likelihood that the central banks will be forced to have other stimulus experiments to revive the European economy. Never in the history have central banks printed as much money as they have now with their QE programs. This is a one huge experiment and no one knows how it will end and what the consequences are going to be.
The future stimulus has obviously no greater probability of success in solving the problem than the previous QE programs have had. They will only kick the famous can consequences further down the road. Any further easing is only likely to inflate the asset prices and not to solve the underlying structural problems that are causing the prolonged economic problems in the euro area. France, Spain and even Italy are according to Bloomberg able to borrow money cheaper than the US government. In the case of Italy the margin is very narrow, only just 2 basis points, that is nowhere near normal for a country that is in a recession. This is approaching the borders of sanity if indeed hasn’t already tripped over. There is absolutely no way the US government would be more likely to default in its loans than these struggling European countries. Yet, this is what the current sovereign bond yields (distorted by the ECB money printing) are suggesting. Therefore we have to ask ourselves how much further this insanity can go, whatever extra stimulus the ECB president Mario Draghi can bring on the table. The rates that the governments pay for money to finance their budgets has been low for a quite some time but nothing has changed for the better in their economies. The low rates and cheap money mean that countries like France or Italy are not forced to undergo the restructuring necessary to make their economies competitive. Instead they can muddle along and the politicians can relax trusting that the ECB will keep the rates at low levels beyond the next elections.
Price was trending higher since 2012 but now momentum has slowed down and volatility risen substantially. This has created a widening top (with a lower high), a reversal formation that indicates that market participants as a whole are not anymore committed to paying higher prices. When it takes place after a period of rising prices and with a backdrop of economic uncertainty, the probabilities of market forming a top and experiencing a sea change are increased.
Price has been trending higher since the low on October 16th but lately has been trading sideways. This week DAX has moved higher with a healthy momentum supported by the positive readings in the German ZEW economic sentiment survey. Now the index is approaching weekly resistance at 9586. This makes me question whether we will have yet another weekly lower high. If this is to be the case then it should happen soon, potentially at or close to the weekly resistance area. However, we have sideways move below the current levels which probably will act as a support and cause some short covering in the event of prices falling from the resistance level. The lower end of the rising trend channel has potential to coincide with the 9311 support, depending how quickly price returns (if it returns) to the level.
DAX, 240 min.
The price attempting to move above the daily high at 9496 from 6th November and should that fail I would I would look trade long close the 9311 support. Close meaning here that I would start to monitor the lower time frame price action some 20 points above this support. The 60 min 50 and 200 period moving averages are currently 9339 and 9314, which would add to the importance of this area should we get a quick move lower. This would be a short term trade with a target near to the latest daily peak or if momentum justifies it near to the weekly resistance level at 9586.
The DAX has a clear widening top and a lower high which indicates that market participants as a whole are not anymore committed to paying higher prices. When it takes place after a period of rising prices and with a backdrop of economic uncertainty, the probabilities of market forming a top and experiencing a sea change are increased. At the same time however, we need further evidence of this taking place. At the moment price moves higher in a steady rising trend channel and has created a support level below. If DAX stays in the daily rising trend channel, then we will obviously see it pushing higher. Trade with the trend (with short term expectancy) until it reaches the major resistance levels and the change in momentum confirms the timing for long exits and shorts.
Disclaimer: Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.
Chief Market Analyst